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Sunday, August 2, 2009

The Psychology Of Human Misjudgement: Reason Respecting

Charlie Munger is Warren Buffett's right hand man at Berkshire Hathaway. Over the next few weekends, we'll be summarizing the text he authored titled "The Psychology Of Human Misjudgement", where he describes some of man's tendencies. By understanding and learning from these tendencies, we better equip ourselves to avoid psychological biases when investing.

Humans enjoy mental exercises, puzzles and games. Munger attributes this to the fact that humans have a natural love for accurate cognition. As such, one of the best ways to convince a man to do something is to explain the reasons for why it must be done.

As an example of this tendency put to great use, Munger describes the philosophy of Carl Braun, the skilled designer of oil refineries. Whenever an order was given within his company, the order must always be accompanied by the reason why. Braun would fire those who didn't give the 'why', because he understood the positive influence it would carry down the line.

Because of this human preference for reason, even meaningless or incorrect reasons will increase compliance. Munger references a psychology experiment where people budge to the front of the line with meaningless excuses that are better received than they should be!

Marketers and various corporate departments will of course use this loophole within this reason-respecting tendency by offering up various claptrap reasons to help them get what they otherwise would not. As such, the student would be wise to investigate/analyze reasons before accepting them as valid.